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The Degringolade.

Long-time reader Jeff Singer passed along this very interesting essay on the financial crisis. The burden of the authors’ argument is that that the crisis resulted primarily from a failure of government, and they marshal a considerable amount of evidence to support this view. Most of it elaborates on what we know of the housing market collapse, adducing the vast collection of government interventions in the decades leading up to the collapse. The perfidy of the ratings agencies looms large, as does the reckless expansion of leverage, facilitated by Fannie and Freddie alongside private (but FDIC-backed) banks. Nor does the Federal Reserve’s easy-money policy escape critical notice.

But it seems to me that the authors give away much of the game near the middle of the essay. They provide a list of “six major government policies that together rewarded short-sighted collective risk-taking and penalized long-term business leadership,” and number 4 is particularly striking:

The FDIC, Federal Reserve, Treasury Department, and Congress undertook explicit or implicit creditor bailouts for large financial institutions starting in the 1980s (First Pennsylvania, Continental Illinois, the thrift industry, the Farm Credit System, etc.) and continuing to 2008 (Bear Stearns). These regulatory decisions led to an absence of creditor discipline of financial institution leverage and risk-taking (especially at Fannie and Freddie) and the “too big to fail” expectation of a government bailout.

Starting in the 1980s! Sweet sunshine, what a concession that this!

In other words, one of those six government failures is thirty years of cosseting the country’s captains of finance. Virtually the entire era of neoliberal globalization rests on this clemency toward banks and finance firms when they get in trouble. The hollowing out of American manufacturing coincides with the integration of global capital markets, all undergirded by the beneficence of government toward finance capital. I have regularly cited a statistic that presents a similarly stark view of the last few decades in American political economy: namely, that finance as a share of business profits quadrupled from 1950 to 2005.

Throw in the long era of easy money from the Fed, which helped to engender the feverish race for more yield, which means riskier assets being purchased and held by more people; the generational shift that increasingly made retirees, aggregated into huge pension and other institutional funds, one of the major influences on the finance sector; the rapid improvement in technology to facilitate near-instantaneous capital transfers around the world; the avaricious bent toward short-term gain rather than long-term value; and the deregulation of finance such that government-guaranteed capital could be deployed in even the riskiest securities — throw these and other factors in and you have in hand all the elements for a crash and panic of historic proportions, which issued in a peculiar regime of plutocratic socialism.

The authors of the essay assert that “Without excessive government protection of creditors, there is little doubt we would have seen creditors act to reduce risk in the U.S. financial system,” which is a very interesting statement indeed. Creditors left undisciplined by market forces, as we have seen, is a recipe for ruin and disaster. But the thing about it is, since almost the whole age of globalization and neoliberalism featured “excessive protection of creditors,” who can even say what the alternative would look like? We’re sunk so deep in plutocracy we’ve essentially no perception of what a better political economy would be.

What happened, I submit, is that America degenerated from a commercial republic into a plutocracy. The government was, beyond all doubt, a major catalyst of this degringolade; but so were developments in the world of finance, some of which have familiar names and are still regularly cheered. It is vital to see that the commercial republic was subverted not merely for the sake of subverting, like some Jacobin irruption of anarchy and destruction; it was subverted for a purpose — the enrichment and enthronement of a certain class or faction, for which plutocracy is probably the best appellation.

Comments (92)

The authors of the essay assert that “Without excessive government protection of creditors, there is little doubt we would have seen creditors act to reduce risk in the U.S. financial system,” which is a very interesting statement indeed.

Bondholders did act to reduce risk. They purchased default swaps. The default swaps turned out not to be worth the paper they were printed on. This idea that market forces were set aside is just rubbish. One can reasonably claim that bond holders shouldn't be able to purchase swaps or swap-offerers need to have assets in escrow, but one can't reasonably claim the government bailing out banks caused bad default swaps to be offered. The two aren't related. Regardless, the shareholders were more often than not wiped out in bank bailouts regardless of what happened to the bondholders, and it is the shareholders for whom the companies are accountable.

Paul, anyone who asserts Fannie and Freddy were a significant part of this should also explain why we also had real estate bubbles as bad (or worse) in other countries. A huge problem that we have when analyzing anything in public policy is the persistence of these zombie concepts.

Market discipline wouldn't work now anymore than it did in the past (1825, 1869, 1873, 1893, 1907, 1929), because of the way we are wired. One factor is the notion that seems to arise every time we have a boom or bubble - "it's different this time."

Another is the "greater fool concept" which, from any given individual's point of view can be rational. Again it is important to remember that market discipline has nothing to do with anything. If you were nimble enough to sell your tulip bulbs at the right time, you were able to chuckle at the fools who didn't. If you (like Mark Kleiman), looked at your appreciation and sold your West L. A. home in 2005, you did quite well. Or, if you worked for one of those Wall Street firms (even the ones that failed) and you banked your annual seven or eight figure bonus or you ran a hedge fund and you banked your annual mark to market fees, you came out OK.

Oh, and what happened politically in the Anglosphere in the 1980's? Hummm.

Al, do you realize that I'm on your side in this? At least, I am via-a-vis libertarian opinion. As for 1980, I would date the rise of finance capitalism farther back than that. Soloman Brothers and First Boston had developed the first prototype MBS in the mid-70s.

Yeah, the whole deregulation thing started under Carter - one of its gurus just died - but securitization and financial innovation in general isn't necessarily a problem as long as regulation keeps up. Unfortunately the Reagan and Thatcher programs didn't include that.

It really is important to understand that markets absent appropriate regulation will always crash and burn.

I would add that making it possible to get fabulously wealthy in a short amount of time on a salary based on mark to market schemes is an invitation to lie, cheat, and steal. Cutting the upper brackets on regular income was a huge mistake.

So, we're blaming deregulation for the problem here when the article blamed, and Paul seemed to agree with the article in blaming, government guaranteed protection of creditors via promised bailouts? Are these the same thing?

It really is important to understand that markets absent appropriate regulation will always crash and burn.

I think this sentiment, too, is foolish. Regulation is no panacea. Do you have any confidence that the Dodd-Frank bill will prevent later crashes?

So I would revise your statement to reflect an older one: dust thou art and to dust thou shalt return. Human things will always crash and burn.

I disagree strongly on the tax issue. There are numerous ways to improve our tax code. Jacking up the income brackets in not one of them.

Lydia, they are related in subtle ways. By "deregulation" I am generally referring to the mid-1990s legislation (did Reagan stay in office into the 1990s, Al?) that removed the old wall of separation between deposit-taking institutions and securities firms. The connection to grasp is that deposits have been guaranteed since the New Deal, so removing that wall of separation allowed the banks to use FDIC-guaranteed capital in the more exotic and innovative (and poorly understand) markets where securities are traded. It was wise (though hardly foolproof), once deposit insurance was established, to maintain commercial banking as a lower-risk, tightly-controlled industry; while leaving the securities trade to the investment banks whose capital had no (overt) government guarantee.

The hollowing out of American manufacturing coincides with the integration of global capital markets

I'm not sure what "hollowing out" means. We're still the top manufacturer (though China is closing if they don't suffer a political collapse as they could), and I'm not sure that the dramatic rise in services in a bad thing. Maybe it is hollowed, I'm just not sure. I'm probably suspicious of the expression because I've heard so many bitter rust-belt UAW workers repeating it while bleeding their own companies into bankruptcy. Perhaps because of this, and since manufacturing unions are a spent force, I tend to think we don't have more manufacturing than we could have because of onerous regulations on manufacturers.

We’re sunk so deep in plutocracy we’ve essentially no perception of what a better political economy would be.... What happened, I submit, is that America degenerated from a commercial republic into a plutocracy. The government was, beyond all doubt, a major catalyst of this degringolade; but so were developments in the world of finance, some of which have familiar names and are still regularly cheered. It is vital to see that the commercial republic was subverted not merely for the sake of subverting, like some Jacobin irruption of anarchy and destruction; it was subverted for a purpose — the enrichment and enthronement of a certain class or faction, for which plutocracy is probably the best appellation.

I think this is all true, sadly. My only observation is that this power grab was all accepted politically by the average guy because he hoped it would deliver him from, or at least delay, the pain of --gasp-- a recession that means a decline in personal wealth for many. Even though it never could, they were willing to trade freedom for the gamble it would. It seems to me this power grab could not have happened without a political acceptance by the masses of a supposed freedom/prosperity tradeoff.

Now I was adamantly opposed to the Paulson bailouts and the ones that followed (I also suppose maybe the "systemic risk" argument is overdone and a ploy), and I'm sure many here were too, but enough accepted the conceptual tradeoff that we sounded like fools with unrealistic worries.

When I visited my native Indiana (from CA) shortly after the housing bubble had popped, I was shocked at even the conservatives in small towns I knew that thought a decline in housing prices itself was a catastrophe. Those who hardly got a whiff of the exuberance on the coasts were fully invested in the idea that housing should not go down and that housing was historically the best investment choice. They were bemoaning the fact that too many were now --gasp-- waiting to buy a house and "just making it worse" rather than going out and paying whatever sellers were asking at the time. The idea that one should make a judgement on the value of an asset before buying it seemed a foreign concept. I could only stand in slack-jawed amazement at how the sons of farmers in the MIdwest had become such gullible sheep, and where were the conspiracy theorists when you really needed them? Do people like this, who've spent the increased wealth the economy delivered them in the past on luxuries, even deserve freedom?

I agree that we've "no perception of what a better political economy would be". I only add that it seems to me this is enabled by a psychological fear of a state of non-increasing economy (and wealth). Not enough people are willing to consider having a non-increasing or even decreasing economy to keep more freedom. Even though the supposed tradeoff couldn't work anyway, it met a short-term psychological need, which is now redeemed with the idea we did the right thing and avoided a worse financial meltdown.

Now I was adamantly opposed to the Paulson bailouts and the ones that followed (I also suppose maybe the "systemic risk" argument is overdone and a ploy), and I'm sure many here were too

Mark, I was the only one of our contributors here whom I can remember who came out openly and strongly against the Paulson bailouts. Others can correct me if I'm wrong. I would also add that I know less about economic matters than some of those who supported the TARP, but I still have not been convinced that I was wrong.

This is a rather unpredictable site, especially on economic issues, and we do not always agree among ourselves around here on those issues.

Paul, thanks for that clarification on "deregulation." That's very useful. I would be curious to know what the authors of the article you discuss in the main post would think about _that_ type of "deregulation."

I was hoping you would use the article as an occasion to comment on our current political economy and you didn't disappoint. A couple of quick points in response to your thoughtful comments:

1) Following up on Mark*, I think it is wrong to conflate the "hollowing out of American manufacturing...with the integration of global capital markets." You are certainly correct when you say the two coincided, but if by that comment you mean to imply causation I would take issue. The relative decline of American manufacturing (as Mark says, we still make lots of stuff in this country) has more to do with technology and trade than anything else. It just doesn't take the same amount of workers it used to to build a car thanks to robots. And the stuff that still takes intensive labor can be done cheaper overseas (i.e. textiles). So I'm not sure what, if anything, global capital markets had to do with any of this.

2) Closely related to point number (1), but speaking directly to the broader issue of this quote:

"I have regularly cited a statistic that presents a similarly stark view of the last few decades in American political economy: namely, that finance as a share of business profits quadrupled from 1950 to 2005."

I can't pop up enough around here and remind everyone that the average American from 1950 to 2005 did very well for himself! Sure, we can have Maximos show up and debate the issue of stagnant wages for the middle-class; or I can play devil's advocate and bemoan the rising cost of housing, good schools, and health care. But even taking all of these 'negatives' into account, I can pull all sorts of stats that show living standards have gone up for Americans across the income spectrum and how we all enjoy goods and services the average family in 1950 could only dream of. Perhaps I'm an incurable optimist and a true believer in American exceptionalism, but I can't help but read about our current problems (i.e. the "plutocracy") and think to myself 'this too shall pass'.

*Mark -- I briefly read some of your comments in the Jeff C. post that turned into a Civil War debate** and I hope you stick around here -- your views are interesting and while I disagree with what you have to say, you do an impressive job of trying to marshal evidence to make your argument. For example, I never knew Lee wouldn't let his daughters get married -- that fact does slightly color my positive view of the man.

**Paul -- I didn't know, although should have surmised, that you are Italian! I'm half Italian myself on my mother's side -- her maiden name is Colantonio and my Grandmother's maiden name is Messina (she obviously comes from Sicily). My Great-Grandparents were the first generation to immigrate to Chicago during the great wave of immigration during the early 20th Century. I was at my Great-Grandmother's tombstone and it was awesome to see her year of birth as 1886 -- there is something about being connected to earlier generations (and showing my girls the link to their heritage) that makes my heart soar. I don't have quite what seems like your family's colorful history but I'm proud of my Italian heritage nonetheless!

Mark, I was the only one of our contributors here whom I can remember who came out openly and strongly against the Paulson bailouts.

That's interesting Lydia, I would have thought more would have joined you. I freely confess I know little about economics, but though I'm not terribly sympathetic to the typical anti-business and anti-globalization arguments per se, it seems to me if we're really held hostage to some banking domino theory (whether national or global) such that we have to accept odious moral consequences that follow from financial policy to avoid catastrophe, then surely that is a catastrophe itself. In the end, I can't help but suspect the specter of catastrophe is a manipulative ploy (Paulson's and others), and as I've hinted, probably unavoidable anyway if true.

Well, to detail the deep, systemic woes of the American economy, and to shed light upon the disastrous policies of both the suicidal Left and myopic Right is well beyond the scope of my very finite free time and WWWtW's bandwidth. I will therefore limit my own comment to the rise of finance and the evisceration of American manufacturing in anecdotal fashion. This is not to say that it is merely an anecdote. This story can be retold thousands of times in hundreds of businesses in the Metro Milwaukee area. I cringe to think of how large the scale of this truly is.

To begin with, I work in a manufacturing plant. This plant was family owned from the early 1950's until the late 1990's, during which time its brand was dubbed "the Cadillac" of their market. The ownership had entered its third generation, enjoyed multiple expansions, hired its own sales, accounting, engineering, tech support, assembly, machining, etc. This factory was not known for its high pay or benefits, but everyone from the owners down to the floor assemblers were on the same team, and the rapport was legendary. During this third generation of ownership, a deadly mix of regulations and taxation was driving this "mom and pop" operation into the ground. This independent factory simply did not have the capital resources to modify their operations as quickly as federal and state government was implementing its will. Even though they had managed to beat the competition in price and quality, even the Chinese, they had to sell.

Enter X Corporation. They are a holding corporation that had decided to get into the water business. They are everything that is wrong with the American Corporation, and proud of it. They have a history of gobbling up a sector, bleeding it dry, then selling off the remains. As a publicly traded corporation, they are compelled to push their stock value up at any cost and deliver ever increasing dividends by their fickle share holders, even if it damages them in the long run. Since most of our shares are owned by publicly traded mutual funds, the word "fickle" is an understatement. Short term gains keep board members employed, so short term gains are the only concern. (As a side, this is why union legacy costs destroy corporations. The management could care less about what happens 20 years from signing a contract, just as long as this quarter's balance sheet looks good.)

Most of the sales, accounting, management, and engineering were downsized in short order. Even though X has owned this factory for a little over twelve years, there is not one person in management, on site, that has been with the company for longer than a year. The culture changed immediately. No longer do we build valves that are simply the best, but rather just good enough, while resting on the laurels of the recognized brand name. Our components are no longer purchased locally, since we are now part of a multinational with buying power in China. Much of our foundational operations have been moved to Mexico and China, while operations from less fortunate factories (ie: closed) have been brought in. The way we are expected to buy, machine, stock, assemble, and ship product is nonsensical, for it is deemed cheaper to kill productivity, quality and delivery time just to prevent us from actually holding inventory. Upper management has made it clear that making a product and selling it at a profit is not the main objective, but rather our existence is based solely as a fulcrum by which they can leverage themselves.

But what is really going on in our dying manufacturing climate? Well, simply put, it's too difficult and messy. There are a dozen federal and state agencies that make manufacturing a headache, on top of prohibitive taxation on top of taxation on top of taxation, on top of a system of corporate behavior that favors exclusively short term gains, on top of being "evil" and "dirty" and therefore subject to every form of liberal hatred imaginable. Blood sucking lawyers can at any time bankrupt the corporation and destroy every job should the product not function perfectly, or someone installs it without having the instructions specifically state the obvious in fifteen languages. That's painful, and I don't even want to know what a union, which is run by bosses with perennial chips on their shoulders can do to make things worse.

Compare that to finance. Finance has little overhead in the way of physical equipment, tools, inventory, etc. Finance doesn't need to employ a vast army of people to build anything. They make nothing, so there's nothing to sue against as defective. What's not to love? Of course, putting 40% of America's wealth solely into finance, which doesn't really MAKE anything or even PROVIDE any service other than wealth, is bound to cause problems. Simply put, there's so much cash looking for any kind of gain, and few avenues for legitimate investment, that every and any industry or sector that has the slightest distortion or effervescence will lead to a massive bubble. That the government has for decades (on both sides, yet Democrats are better at it) been pouring fuel on this fire has only made things that much more disastrous.

In the end, blaming the crash on such things like credit default swaps is like blaming the hood ornament for the car that just ran you over.

Patrick, what's interesting about your comment is that I would just guess that the "capitalism haters" will consider it confirmation of their theory, while we "free market sympathizers" consider it confirmation of ours. And I think we're right. After all, what started the sad tale? Government. Taxation and over-regulation driving the original, good, solid company out. It never ceases to amaze me that those who criticize capitalism can do so while taking it for granted that things that free market advocates _loathe_ are in place. It's as though we're told, "Now, let's take X and Y and Z, which you guys have inveighed against, as givens, and then let's see how greedy financiers make profits in that situation and drive companies and the economy into a tailspin, and then we'll dub the resultant mess 'capitalism' and criticize it as such." I always find that rather annoying.

I supported the TARP as originally proposed, yes. I also have been convinced by extensive study and discussion with knowledgeable folks that we really were at the precipice of total ruin on September 2008. We know, for instance, that the commercial paper market, along with the wider money market, was frozen solid. These are the mechanisms by which normal industrial companies have for years funded their day to day expenses, like payroll and keeping the lights on. When the Fed released all those liquidity facility documents some weeks ago, it was revealed that companies like Harley Davidson and McDonalds were dependent for weeks on the central bank for regular short-term funding. That's not simply a banking crisis; it's an augury of full-scale calamity.

I've argued repeatedly that that no reasonable reading of the Federal Reserve Act could permit a Fed Chairman to just stand aside and let Harley Davidson and McDonalds fail for lack of access to CP markets. One day you're a going concern with an effective business model; the next day you can't make payroll. Not just banks but everyone. Price stability and lender of last resort are statutory mandates for these officials. Bernanke and Paulson could have resigned, but they could not have just let the economy collapse.

Now, we can lament how we got to this state of affairs (as I have done here and elsewhere many times), but we cannot, in my judgment, indulge the fantasy that September 2008 was a plausible opportunity to fix it by some abrupt laissez faire swoop. It was not. The repair (if it happens at all) must be the painstaking work of years and even generations.

Jeff Singer, in regards to the 1950 to 2005 comparison: let's just stipulate that you're right about the gains in prosperity. Now reflect, as Mark eloquently argued, on what the cost to freedom was. The whole bloody thing had to be backstopped by government. Wall Street spent three or four decades operating under implicit guarantees from the taxpayers. The financialization of our economy under pressure from integrated global capital transformed us from a commercial republic into a plutocracy, an aristocracy of luxuriant wealth, and gave a good portion of us a surfeit of that luxury. The old Roman Christian Salvian could answer that: "Rome is luxurious but she is full of misery. She is dying but she laughs." So we sold our liberty for iPhones. This was a thirty pieces of silver sort of contract.

So yes, the average American from 1950 to 2005 did pretty well. (Since 2005, not so much.) But there were very real costs. One often neglected one is that in 2005 the average American had to send his wife out into the workforce as well, just in order to pay for their housing and the schooling of their children, whereas the average American in 1950 could maintain a happy life on one income. That timeframe also correlates with the appalling breakdown in family integrity, with whole huge sections of the country sinking into generational poverty and dependency, and mores relating to sex and procreation (which must always be at the root of any society) degenerating with frightening rapidity. That degeneration has profoundly influenced our financial crisis as well, for we can all now see the yawning gap in numbers of young productive enterprenuers compared retirees.

So I would say that the jury is still very much out on all this, even granting the material prosperity.

Thanks Paul. I may be of a starkly conservative bent, yet that very conservative nature demands that I examine the shortcomings of the policies put forward by those who are the de facto champions of conservatives. As such, I cannot in good conscience view economics in the same way that I would football. If only more people on both sides were willing to do so.

I would like to add, however, that not all regulations are evil. Some regulations even assist businesses (so long as the government acts in good faith) more than the lack of regulation. Even bad regulations can be worked around, given time and a limit to their numbers. The problem that seems to damage manufacturing the most is that regulations multiply, grow more arbitrary and arcane, are based upon sentiment rather than science, establish internal loopholes for the politically connected (usually to both parties simultaneously), and simply change too fast for compliance to be met. This is one of the reasons why so many businesses are simply sitting on vast amounts of liquidity right now. Nobody is sure what is going to happen next with a Leftist radical in charge of the country, and they need sizable "warchests" just in preparation for the next EPA or OSHA mandate. Sure, maybe the next given mandate might (unlikely though it may be) one of the "good" regulations, but it can cost millions just to comply. Further, a given factory may face regulations that are simply impossible to fulfill, and may have to be decommissioned at a moment's notice. As such, it only makes sense to not spend capital to upgrade a facility or hire new workers that may have to be scrapped and dismissed tomorrow, when such an upgrade can be done offshore with far less risk.

So yes, the average American from 1950 to 2005 did pretty well. (Since 2005, not so much.) But there were very real costs. One often neglected one is that in 2005 the average American had to send his wife out into the workforce as well, just in order to pay for their housing and the schooling of their children,

I struggle with this. Does "schooling" include a college education? Because I and many think this is a bubble long overdue to collapse. Since the 70's this cost has skyrocketed and been held to me mandatory, and I think the whole thing is a mess. But I'm of the same mindset of Ivan Illich, so you're forwarned on that.

... whereas the average American in 1950 could maintain a happy life on one income. That timeframe also correlates with the appalling breakdown in family integrity,

But couldn't the causation be running the other way? I think the epidemic of fatherlessness is the major problem, but it isn't likely from financial causes.

I would also like to dispel the idea that robotics has gutted employment in manufacturing. If anything, it is the opposite. Those robots make the products they _assist_ in building cheaper, which in turn allows for higher volume. Those same robots need to be manufactured themselves, and maintained, and staffed with tech support, programmers, engineers, sales, management, etc. At worst it's a wash, and I am of the mind that the robotics industry has increased the demand for employment.

As for the canard that only the young and most educated profit, tell that to my (retired) eighty year old grandfather and his eighth grade education. He was one of those people building the robotic arms that are operated by many other manufacturers.

Patrick, I understand the heartbreaking story of a struggling business, but how is that different from the other historical cases?

Wouldn't furniture makers from the Carolinas, steelworkers from the Northeast, and auto workers from the rustbelt tell a similar story from year past? Were each of those a tradedy? In the case of the auto industry, what happened was that the manufacturing of autos moved south into non-union factories. Now I get what you're saying that there isn't some simple cause like too high wages and intransigent and greedy unions in your case, but still the causes for manufacturing moving from one location to another is not new for other reasons too.

I cannot say they don't the financial aspects you mention don't make it significantly worse, but my contention is that though America is still a manufacturing powerhouse in overall output, it could be manufacturing a whole lot more by reducing the regulations, and I think you acknowledge this.

Second, here's where I reveal my non-hostility to globalism in certain ways at least. The term "manufacturing" is a blanket term and often conceals some important things. The Japanese always held that it was better for other nations to manufacture what they designed. I think they're right. What is manufacturing? At least we can identify a few generic phases: design, production, and assembly. Would you rather design or produce? Produce or assemble? I don't think there is a particular advantage to doing all three, but I'd love to hear you opinion on that because you have experience and I don't! Easy to have an opinion huh? Anyway, show me the multinational who designs a given product and I'l show you where the money is going. There is a food chain here. Those designing and closest to the design phase are always going to have the more power and wealth.

In contrast, the Americans (at least in the rust belt) tend to think that anything that happens in a factory is manufacturing, and anything outside not. I swear if you put up a factory-type building and did nothing in it they call it manufacturing anyway.

Look at Toyota. How many cars are produced in Japan? Few. How many designed there? Many. Iphones? Produced in the US? None. Designed there? All. The boxes of all Apple products boldly declare "Designed in California". Apple will soon be worth more than Exxon, and though the retort will always be "yeah well average people don't share in that wealth but the corporate fat cats do", I'm doubtful that argument holds up to scrutiny, though I don't have the economic props to prove it.

I can't pop up enough around here and remind everyone that the average American from 1950 to 2005 did very well for himself!

Perhaps I'm an incurable optimist and a true believer in American exceptionalism, but I can't help but read about our current problems (i.e. the "plutocracy") and think to myself 'this too shall pass'.

I agree and I'm hopeful too at this point. I am not ready to say at this point that what Paul describes is irreversible. Maybe it is naive to think so since I'm not an economist. I know it will be against the odds, but the US has been defying the odds since its inception. I've already expressed my shock and disappointment at some of my home state's citizens who I thought would know better. And I wish I could say I was shocked by the outgoing Congress, but I'm not and always thought they'd sell us down the river as they did. If enough of us stop thinking for ourselves we're sunk, but I'm optimistic there are enough to reverse course --I suspect we'll know the answer within about 4-5 years. I'm praying for that. Not so I can have better material goods, but because it will go so much worse for so many in non-material ways if we go the way of Britain.

*Mark -- I briefly read some of your comments in the post that turned into a Civil War debate**

Thanks for the kind words. You said you were excited to show your children a link to their heritage; I risked making myself a total boor (okay more than risked) to make equal time for the point, at its most basic, that we'd better be really careful before we declare the CW period as something unprincipled, or we're undermining much of the hope we have. Is America exceptional or not? BTW, I have a hero from the CW period, and I know about his children too. If our ancestors failed to live out the principles of the Founding, what makes us think we can do better? If it's true, fine. If it isn't, how can we claim to be concerned about a shared culture and heritage when undermining confidence in our own nation? Much of this skepticism would be shocking to the WWII generation I can assure you. We're they naive too? I think it's false on the merits, and I think there are a whole slew of narratives that borrow on the idea that something went *fundamentally* wrong as the premise of various arguments, implied or otherwise. I think it is had to deny that it is now far, far easier for people to believe the nation has been running on a false foundation for generations, rather than that the nation has always conformed to its true principles in a cyclical pattern, as it must be, of which we're at the moment on a vicious statist down-trend.

Those same robots need to be manufactured themselves, and maintained, and staffed with tech support, programmers, engineers, sales, management, etc. At worst it's a wash, and I am of the mind that the robotics industry has increased the demand for employment.

This is a fortunate flip-side of the less fortunate fact that technologies their inventors originally promised would "save time" don't in the end.

My story of a struggling business was not one of struggling against the price of copper or oil, nor against cheap labor in China, nor even against the next technology. Rather, it was crushed under the senseless bureaucracy, tax structure, and litigious bloodsport that damages our ability to make or do anything. Heck, this factory never organized, so it's not even the private sector unions' fault. Further, it was beginning to open markets to sell its products overseas prior to the takeover. What killed it was that it was too small to be of political notice or sufficient capital to work around arbitrary regulations.

That very same factory, thanks to its new and incompetent ownership by senseless financial drones who follow every fad under the sun to "improve" production (the numbers all around speak otherwise), is now far more capable at dodging those same regulations and manipulate its finances to reduce its exposure towards taxation. As such, the factory produces significant profits in spite of its haphazard operations. Capitalism may be flawed, and there is plenty of room to discuss how and why, but this certainly isn't capitalism at work.

Now I'm not at war with regulations or regulatory bodies. Far from it. There is certainly a place for an objective third party to insure that all parties are satisfied with what they receive in return for their effort, be it the factory itself, its vendors, its clients, its capital, and its labor. Further, the community that it resides in has a right to allow and disallow a given activity that it would be affected by; I doubt that our neighbors would enjoy drinking water laced with DCM for instance. Even so, the current regulations between federal and state agencies is labyrinthine, arbitrary, and downright blockheaded. That these rules are usually created without the knowledge or consent of the Legislature, and sometimes even the President or Governor respectively, and yet operate with the force of law without check via elections, thus making things positively nightmarish.

Why don't we buy American components for an American assembled product? It's not so much the pay scales as the tax burdens. The Communist (well, structurally Fascist but six and half-a-dozen...) Chinese take once, but Americans are known for innovation, and innovation in taxes and fees is certainly innovation of a sort. We are taxed for turning a profit, we are taxed for existing, we are taxed for employing people (who are taxed themselves separately), we are taxed for buying and taxed for having, we are taxed for the property and taxed by hundreds of fees and licenses. When the taxes are done, three weeks from the last fiscal transaction have passed and the next month will be dealt with by the accounting staff. This is all done recursively like some sick Fibonacci sequence as we buy from our American vendors, who should they buy American for their raw materials, suffer yet more. Against this, the Chinese have their cut and America takes only the state sales tax.

As for the second point, America loses yet again. The engineering staff was gutted after the takeover, as with other takeovers by this holding company, since R&D is costly, and any necessary engineering can be done in India. The few engineers left over exist for either support or might even be allowed to design new plastic covers. Since the whole game is about short term gains, there is no need for investment in the future. When the profits start to drop, we will be gutted yet again to look more promising to the next faceless corporation with no vision beyond the next fiscal quarter.

No, in the end, the worst of the envious (classical definition) Left has merged with the worst of the gluttonous Right to produce this abominable business climate, all while bearing neither the charms of either.

This is a fortunate flip-side of the less fortunate fact that technologies their inventors originally promised would "save time" don't in the end.

What!!?? Surely you jest! I assure you that mechanization and roboticization has aided production geometrically in both cost and time. What I am stating is that through this technology, the cost to produce has dropped, thus allowing the money saved from the subsequently reduced price of one thing to go towards a different purchase. As such, more net business is transacted, allowing for more jobs to be needed which more than replace the ones lost.

Mind you, such gains in productivity are dependent upon the one designing the production line. An idiot planning a production line with twenty million dollars in robots is still an idiot.

I get all that. My profession is IT, and I started out in automotive factories. I'm one of the jobs that is spawned by automation. I was making what was I guess was too obscure a point and not worth explaining --with jokes it never turns out well. :)

My story of a struggling business was not one of struggling against the price of copper or oil, nor against cheap labor in China, nor even against the next technology. Rather, it was crushed under the senseless bureaucracy, tax structure, and litigious bloodsport that damages our ability to make or do anything.

I got all that already. I was just wondering --and I admit I don't know --if the "dying manufacturing" thesis is overdone even still since manufacturing has been on a dying and rebirth cycle since the beginnings of the industrial revolution. But look, I fully understand, and already said, that if the regulatory and tax environment doesn't change in a lot of ways a lot of industries are going to be in decline. So I guess its just a minor and perhaps trivial quibble on reflection over whether there it better to think of a "dying manufacturing" thesis or a "high regulatory and tax regime" thesis, which probably does hit manufacturing worse because of the complexity involved.

I thought Patrick's story was pretty straightforward and didn't sound like a rant against innovation, robotics, or even foreign purchase of parts as such. The part the horrified me the most was where he said that, in essence, they are being told to engage in irrational business practices vis a vis what I consider the "real" or "normal" goal of making a good product and selling it to satisfied customers, and that they are being told to do this so that some people can make short-term big money in ways that involve gutting the actual, real, productivity of the business. This makes me shudder. It conflicts with my idea that, in "good" capitalism, things ought to be what they are. Widget maker should make good widgets, car makers should make good cars, and that's what we should be all about. Call me naive, but if the financiers' involvement means that we deliberately destroy that for the sake of something else, something essentially less real and evanescent, underwritten by a never-ending promise of government created "money" (ex nihilo) and bailouts, then something is very, very wrong and this is not capitalism as I have ever wanted to defend it.

On another topic:

I would be interested in Jeff Singer's take on Paul Cella's 5:41 comment from yesterday on the removal of the "wall of separation" between FDIC insured and other money in the 90's. What do others think about that?

It is true that the producer of anything from nuts and bolts to software has its inherent risks and eventual decline and fall. All things are finite and imperfect in this world, and businesses are no different than anything else in this world; all mankind and all that man has wrought suffer the curse - "...quia pulvis es et in pulverem reverteris." Even so, we may weep and mourn when grandma passes away by natural causes, yet we certainly don't bear ill against our fellow man by this inevitable consequence to mortal life. This is ever so much more different than the case where grandma, still healthy and active, is forcefully smothered to death by her own pillow. The former is but the free gift of mortal life expended in due time, while the latter is violence and unjustice by the hands of a monster, a fiend, a murderer.

As for the "dying manufacturing" meme, I assure you that while we certainly do still manufacture in America, and often for things that are not readily visible to the average consumer, we are in a very real death spiral. There may be a kick up and a gasp, but the swirling vortex draws us in ever further. Sure, pigheaded union bosses and myopic managers have done more than their fair share, but were it only these things to contend with! I assure you that I would trade our current situation for that in a heartbeat were it only those two things. First it was unskilled labor, then later skilled, and now even the professionals in industry are wasting away. Perhaps it is one thing for unskilled labor, and perhaps even arguable for skilled labor, but slowly and inexorably, the professional class in industry is hollowing out this very moment. What I have seen with the job market amongst engineers, even nationwide, is a dark omen for dread things to come. That the greyhairs have been retiring (willingly or otherwise) early while the young have been diverted from their profession to other avenues has been a mask for the reality that the bottom is giving out. And yet, what I am trying to convey is not yet worth the opening remarks of the seething jeremiad that must be cried out to all of the West if mere survival is any one of our priorities.

Lydia,
Please understand that I don't bear any ill will towards finance per se. Corporations are what they are, just as investors are what they are. Investors place their money in things that they believe will return a profit, and have every right to do so. The board of directors, who are voted upon by those shareholders act according to the desires of those shareholders. That those shares (and therefore votes) are traded with mind-numbing celerity and thoughtless ease has the function of eliminating any sense of ownership of that enterprise or care for any consequences that future owners, future managers, and future labor shall have to endure.

There are fatal flaws indeed with our current corporate system, yet the very last thing we need are priggish Leftists to attempt to "fix" them. Lord save us from their "tender administrations"! The Leftists may be gifted with a sense of disgust for the iniquities of Capitalism, yet their bromides and tonics are more deadly yet. Their spirit is wholly that of Invidia, that is envy, a loathsome hate for the good fortune of others. They bemoan the blessings of others, and take glee in their neighbors' misfortune. Their lips dissemble with false innocence, yet their hearts are so blackened that they would pluck out their right eye in order to blind their brother. Yes, they are truly the sons and daughters of their father who is Cain of old. Heed not to their advice, for they would cure a sick man with arsenic.

No, if investment is to become sound, and corporations to be honest and productive, we must begin to look with clean hearts and objective consideration. I have a number of ideas, ones certainly not popular, and would perhaps receive the shrieking acrimony of both the Left and the Right, but I think we must begin with encouraging a spirit of ownership, to our lives, our nation, our workplaces, and our investments. This, I believe, is what we are most lacking in our present economy, and the source of many of our current troubles.

Patrick, I hear you and I don't disagree. I was just trying to work it through my understanding. It didn't occur to me until now, but maybe there's an analogy to farming. I'm the son of a farmer, and I think there is little doubt that the ruination of less than large farms was due almost entirely to financial causes. There is still just as much farming as there ever was, and more, in terms of total output. But it is mostly done by agribusiness marching to the tune of federal subsidies, including ethanol subsidies. Now you don't have to be a leftist, a greenie, or an idealizer of the hard work of farming life (Willie Nelson?) to know that there is a lot wrong with this that we are paying for in a lot of ways. Not least the precedent. First they came for the farmers ...

You aren't dreaming Lydia. My memories are dim on this, but I think, and would suspect in any case, that a lot of Midwestern farmers joined hands with the green lobby (supporting their Congressmen who supported it) because it was thought to raise the price of corn, and it did. To reprise Paul, we're "sunk so deep" into federal subsidies and its benefits that we can't even imagine the alternative. It has corrupted so many.

Even though agribusiness does most of the farming now, many small farmers retired and held onto their land and rent to the large operators and reaped the appreciation of farmland that also came from ethanol boost in the price of corn --though I confess I have no idea how much higher farmland is because of this, whether much or little. This has been going on for decades. Small farmers are waiting to cash out on farmland if it ever stops going up, but real estate always goes up doesn't it?

And then there is the fact that ethanol isn't really a benefit to the environment anyway, and petroleum is actually more "green" ... one could weep.

"And weren't the greenies originally all in favor of ethanol subsidies? Wasn't it supposed to be the new, green, idea? Or am I just dreaming when I seem to remember this?"

Sigh. Lydia in another thread, I remarked to Jeff C. that he should consider not ever again believing whatever source from which he got a particular piece of information.

Using food stuffs (esp. corn) to produce fuel has always been viewed skeptically by environmentalists for a number of reasons, not the least of which is that subsidies to use corn would be better used to develop technologies like cellulosic ethanol. It was at best something to be improved upon and replaced. Some may have been initially optimistic but it soon became apparent that early optimism (by some) was misplaced.

"It really is important to understand that markets absent appropriate regulation will always crash and burn."

"I think this sentiment, too, is foolish. Regulation is no panacea. Do you have any confidence that the Dodd-Frank bill will prevent later crashes?"

And here I thought we were going to play nice. Oh, well. Paul, It's the burning that is problematic. This post and the accompanying graph may prove instructive. We may not be able to abolish the business cycle but there is plenty of evidence that we can significantly tone it down with regulation and ameliorate the effects with fiscal and monetary policy.

"If we define “banking crisis” to mean bank failures and system losses exceeding 1 percent of a country’s gross domestic product (GDP), we find that in the period 1875-1913, a period of marked expansion in international trade and capital flows comparable to the last three decades, there were only four banking crises worldwide.1 By contrast, in the period 1978-2009, a period of much more extensive bank regulation, central bank intervention, government protection of depositors and other bank creditors, and government control of mortgage markets, about 140 banking crises occurred worldwide. Of these, 20 were more severe than any crisis from the earlier period of 1875-1913, in terms of total bank losses as a percent of GDP."

I guess we pick the metrics that make out point regardless of their shedding any light. Consider, if you will, the unemployment levels in the graph I referenced. The folks at AEI aren't going to care about that, of course, as their patrons are of that plutocratic class that sails through depressions and recessions without being harmed.

"So, we're blaming deregulation for the problem here when the article blamed, and Paul seemed to agree with the article in blaming, government guaranteed protection of creditors via promised bailouts? Are these the same thing?"

Deregulation with a painless bail out is an invitation to take excessive risk, at best, and outright steal at worst. Also regulation failed to keep pace with innovation (the new instruments should have been exchange traded, for example) and, as Greenspan testified, he (and others, e. g. Summers) were overly optimistic as to the ability of bankers to assess and deal with risk.

Paul, I get the impression you believe plutocracy to be a bad thing. Rather then fire on me for suggesting that a good start to correcting the situation might be to defund the plutocrats with a fairer system of taxation, how about you tell us why that would be a bad thing and what would you do?

My point is very simple, the percentage of wealth concentrated in the financial sector and salaries of top executives across the board has little (if anything) to do with productivity and everything to do with cronyism, usury and rent-seeking. How is that wrong?

Actually, in my dim memories of the beginnings of Ethanol I had forgotten that there was a large component of the "get off dependency of foreign oil" mantra from the oil crisis. That might have been the main impetus rather than any green initiatives. In any case the subsidies are still rolling on when all the reasons have been debunked.

Rather then relying on propaganda from AEI, I would urge interested folks to investigate widely. Deregulation didn't begin in the 1990s, it continued from the late 1970s and accelerated in the 1980s. Note the optimism expressed here,

"'Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.' — Alan Greenspan in 2004"

"Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions."

"Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately."

"But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading."

"Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”

"In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said."

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

"Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said."

"But he called that possibility “extremely remote,” adding that “risk is part of life.”

To answer your question from 8:30 AM above, my gut reaction to Paul's suggestion, which I've read in other places, was that it made sense in that FDIC deposits being used to speculate seemed ultimately to lead to "too big to fail" economics. On the other hand, a little investigation suggests that the end of Glass-Stegall was not the problem in 2008:

Well Mark, your farm analogy is pretty good, and yes, the introduction of subsidies, regulations and the Death Tax did put the family farmer out of business, which was the very opposite of what the do-gooders in Washington had intended. Of course we all know what road is paved with good intentions...

As for ethanol, its lobby started out in the 70's Oil Crisis, which Mark is correct on. With the fall in the price of oil, enthusiasm waned. It was only later that ethanol (along with MBTE) was introduced as a way to reduce pollution. Of course, only now we find that ethanol is worse for the environment, once one figures in the lowered horsepower, engine damage, transport, processing, distillation, production, harvesting, etc. Of course, liberals still carry water for Archer Daniels Midland with their cellulose dreams. Of course, there is technology available that could easily convert cellulose into a viable fuel at less cost, but since it's not ethanol, and since it would line the pockets of oil companies more than ADM, there's no interest.

"Well Mark, your farm analogy is pretty good, and yes, the introduction of subsidies, regulations and the Death Tax did put the family farmer out of business,"

Subsidies are a problem but one needs to farm by the section to make money out of commodities. I don't know what regulations to which you refer but the estate tax claim was debunked long ago. No one has been able to find a family farm that was lost due to estate taxes and they have looked.

"The Congressional Budget Office examined that question in a report they completed in July 2005. The report is titled, “Effects of the Federal Estate Tax on Farms and Small Businesses,” and is available online at www.cbo.gov/ftpdocs/65xx/doc6512/07-06-EstateTax.pdf."

"The report shows that in 2000, the number of farm estates that had to file an estate tax return was 4,641 and of those a little over one-third (1,659) owed any estate tax at all. Of the 1,659 who owed estate taxes only 138 did not have sufficient liquid assets to immediately pay the taxes due. It should be noted that for farmers, the estate tax payments can be paid over as many as 14 years. The 2000 filings included the estates of persons dying in 1998, 1999, and 2000 and the exemption level varied from $625,000 to $675,000, according to the year of death."

"If the exemption level were raised to $1.5 million, the number of farm estates required to file an estate tax return would shrink to 1,005 with just 300 of those having to pay any estate tax. Of that 300, only 27 would lack sufficient liquid assets to immediately pay the tax. At a $3.5 million exemption the numbers would be 187 tax returns, 65 owing any tax, and 13 with insufficient liquid assets to pay the estate tax liability. The CBO notes that its analysis “probably overestimate[s] the number of estates with taxes in excess of liquid assets because they do not reflect money held in trusts.”

"If we accept that the number of commercial farms in the US is around 500,000, then with a $3.5 million exemption, only 3-one thousandths of one percent of farms would be in jeopardy of having to sell some land to pay the taxes. These numbers also assume that at least one of the heirs wants to stay on the farm and continue the operation. In some cases the farm is broken up after death not because of taxes but because some of the non-farm siblings want to sell the land and invest the money in other ways."

"It is often the lack of interest by family members to remain in farming that causes the break-up of family farms, not estate taxes."

Yet another zombie lie refuses to die. I am assuming, of course, that Patrick posted in good faith but there is a level in the informational food chain where the folks passing these things on know that they are lying and yet they keep repeating this stuff. I'm suspicious of everything i read; "trust no one, suspect everyone".

Paul, I get the impression you believe plutocracy to be a bad thing. Rather then fire on me for suggesting that a good start to correcting the situation might be to defund the plutocrats with a fairer system of taxation, how about you tell us why that would be a bad thing and what would you do?

I've mentioned several specific recommendations in recent months. One is to restore of some of the New Deal banking regulatory quarantines. Another is to gradually push securities firms back into private ownership. I'm intrigued by the idea of transactional tax on certain classes of securities, which escalates as the securities become more and more abstracted from actual productive enterprise. Thus a plain vanilla interest rate swap would be taxed at a lower rate than synthetic CDO.

I'd be prepared to consider adjustment of marginal income tax rates in the context of a massive overhaul and simplification of the tax code only. I want to liberate productive business, not fetter it; but my view is that the financialization of the economy has become one of the most fearsome fetters business faces.

We probably need a clearer definition of "plutocracy." Maybe that is a subject for another post. But it seems like folks on your side, Al, use the word to refer to "anyone who is wealthy," while I have a much more fine-tuned definition in mind. I see the plutocracy as primarily composed of that class of professionals dominating the Washington-to-New-York corridor, mostly lawyers and financiers rolling in and out of government and lobbying and the TBTF institutions. The big fund managers play a major role as well, given how influential the big pension funds are. Retired bureaucrats, policemen, firefighters and teachers, through their massive investment funds, comprise the owners of most publicly-held corporations in this country. It's no accident that when some financiers were looking to develop the first gold ETF, they courted and eventually hired the head of CALPERS to run it.

But I'm not about to include every successful man who made his wealth by honest hard work, innovation in productive enterprise, and creative perseverance, in the term plutocracy. I do not endorse the Leftist politics of resentment of success.

I do give them more credence but in this case the whole death tax/sell the farm nonsense has been debunked so many times and so many places that i figured a Tennessee ag prof. and the CBO would be sufficient. The report isn't new and the numbers seem to check out.

This is like the stuff we just heard from McConnell et al on the Bush tax cuts. The numbers of actual small businesses affected is vanishingly small and the notion that paying an extra 4k/100k is going to keep any sane person from entrepreneuring is ridiculous.

Anyway you mentioned Dodd-Frank above. I don't know. I hope it improves things; we will see. I found this page at the St. Louis Fed's site that you may find useful.

"One is to restore of some of the New Deal banking regulatory quarantines."

A good idea but regulations have to pace innovation. Some of your suggestions do this.

"Another is to gradually push securities firms back into private ownership."

Possibly, that may not be enough given the behavior of some private hedge funds.

"I'm intrigued by the idea of transactional tax on certain classes of securities, which escalates as the securities become more and more abstracted from actual productive enterprise. Thus a plain vanilla interest rate swap would be taxed at a lower rate than synthetic CDO."

i'd modify that to a flat but very small transaction tax on all securities transactions. My understanding of such a tax is that its main value would be to discourage computer driven churning. A type of transaction that is problematic regardless of the vehicle.

Exchange listing and capital requirements are a better way to deal with the OTC exotics (IMO).

"We probably need a clearer definition of "plutocracy." Maybe that is a subject for another post. But it seems like folks on your side, Al, use the word to refer to "anyone who is wealthy," while I have a much more fine-tuned definition in mind."

Ditto, your assumptions on the left may be dated. i see a critical mass issue, perhaps. The swelling of the financial sector has created a whole lot of very wealthy folk whose wealth is divorced from socially useful production. Much of that swelling is from usury and rent seeking and too much of executive compensation in general is the same.

It's no coincidence that wages in general went flat as the top rates were cut and deregulation empowered the financial drone class.

Great wealth should only be attainable through appreciation over time. If a manager truly manages well and creates wealth, that wealth will be there in five or ten years and he should be compensated in restricted stock to incentivize persistence.

Annual compensation is different. It can be easily gamed and has been. A six figure salary is unproblematic; an eight figure one should be impossible. Tying compensation to quarterly earnings, stock price, or marking paper to market is a prescription for greed and corruption.

We must first get the leftist, democratic, socialist lawmakers out of policymaking at the congressional level. We must get rid of Fannie Mae and Freddie Mac. The marketplace must return to responsible mortgage underwriting. We cannot give housing to the poor of America.
We must decouple investment banking from commercial banking. We have ex senator Phil Graham to thank for this boondoggle. Investment banking will destroy the commercial side in its rush to package and sell investment products as we have seen. The marketplace will work if we can get government out of the way. Business enterprises must be allowed to fail and then new business will rise up and not make the same mistakes which have been so amply guided by the socialists who want to destroy the biggest engine of freedom and liberty we have ever known.

One of the good things about living in Milwaukee is that I don't have to drive more than half an hour from any part of it to the countryside. So, I spent some time with a few high school friends before heading off to my parents for the family round robin and Rose Bowl game. Some of my friends just happen to work in agriculture. I mentioned all the wonderful facts about the death tax not killing farms that Al had been so helpful in providing. What I received was an earful.

Let's take one of them, as I recall his explanation best, and let's call him John. His grandfather owned a dairy farm, and had passed away. John's uncle had helped, and later took over the operation when the grandfather grew too infirm to handle the work. Now when the grandfather passed away, his uncle and his father each received part of the farm. The uncle received a larger share for all the help, but he still had to buy out his brother's portion. Now this is during the 80's, when suburban Waukesha was beginning to really heat up (for WI at least). So, the uncle gets to work the farm, pay off his taxes and the loan he took out to buy off his brother.

Now as it is, his uncle is getting on in years, and both his daughters (John's first cousins) have no interest in running a farm. My friend, however, has been helping out on the farm since high school, even going to college for an agricultural degree. Now, he has been having to live in a relative state of self induced poverty in order to save up a large enough warchest for the day when he inherits one half of the farm. His wife and daughter are all soooo happy about this too; sorry but I had to make sure to include that. You see, he will have to buy out each of his cousins' quarter share of the property by outbidding the corporate farm and land developers, pay all the wonderful taxes and fees for taking over the farm and property, pay the sales taxes for land purchase, make sure all his licenses and certifications are in order by the DNR eco-fascists (he might have to lawyer up anyways), and then consider how to make any money on an imploding dairy market. Inheritance taxes are pretty low on the hierarchy of disaster on the farm, but they do make it just that much easier to just give up and sell out.

Of course, were he to sell out in this situation, it wouldn't wind up in any report, and as such smug coastal leftists will continue to simper about zombie lies.

Oh, and one last thing... When one of them mentioned it, all agreed. Please al, whoever you are, wherever you are, trespass on their land, they beg of you to try.

"It is often the lack of interest by family members to remain in farming that causes the break-up of family farms, not estate taxes."

So, Patrick's friend admits he is going to have to struggle to make it work for a host of other reasons, primarily buying out his cousins and an imploding dairy market. Yet if someone points out that it isn't the estate tax that is to blame for his predicament he suggests a flimsy excuse to start shooting at them. Sounds perfectly zombified to me.

So, Patrick's friend admits he is going to have to struggle to make it work for a host of other reasons, primarily buying out his cousins and an imploding dairy market. Yet if someone points out that it isn't the estate tax that is to blame for his predicament he suggests a flimsy excuse to start shooting at them. Sounds perfectly zombified to me.

What am I missing? Patrick said it contributed to the problem among several things, and Al says or implies Patrick is raising the "whole death tax/sell the farm nonsense". Al mischaracterized Patrick, and lampooned his own characterization, otherwise known as shooting a straw man.

I'd have to look into this, and I don't have the time, and definitely don't have the economic background to do it in any case, but it seems to me al is feigning more knowledge than he has, and is banking more on the CBO numbers that is warranted in deprecating death taxes as a contributing cause, which was Patrick's actual assertion.

For one, CBO data can be meaningful, but it isn't always due to the assumptions it makes. Am I the only one to think that measuring whether they have "sufficient liquid assets to immediately pay the taxes due" is a bit ... uh reductionist? As if the that is all that matters about the taxes is that you can pay it? Tax rates matter, especially cap gains, death, and such because there is a threshold at which sane people won't take the risk because the reward isn't high enough. I think Al's CBO numbers don't make his case at all, and they certainly don't refute Patrick's modest claim. Liquid assets aren't so sure a marker of wealth, and it seems odd that the CBO report focuses on that entirely. And saying "oh you can pay it out over many years" doesn't make it that much easier to swallow, though don't tell anyone trying to get your money.

There is no question that it is often lack of interest. I'm an example. But it's also a fact that small farmers have long had to have good-paying 2nd jobs to make it as a small farmers. I can't recall a single small farmer I knew in the county I lived in who didn't have a factory job also. I can recall right now all my neighbors and classmates fathers doing the same in rural Indiana in school. Now I'm not saying this necessary should not be, I don't know, but I'm saying that if you think the amount of net income due to taxes to do such a hard-working task are not a large influence on interest in becoming a farmer you're dreaming.

Patrick seems under the mistaken impression that 55% taxation for an estate is not reasonable. Starting from 45% of what you've earned before all other taxes should be enough. He has to realize that at a certain point ... well, uh ... you know.

And I love this quote from the report:

It should be noted that for farmers, the estate tax payments can be paid over as many as 14 years.

I provide a report with numbers and you all flock to the anecdote with no numbers and a bunch of hearsay because it confirms your ideological prejudices.

Patrick, what is the likely basis of the farms in question? How about throwing some numbers at us. How many acres? How many stalls? I shopped some farms and some were within the deductible. What I hear is that we may have had some poor estate planning.

I provide a report with numbers and you all flock to the anecdote with no numbers and a bunch of hearsay because it confirms your ideological prejudices.

You alleged that "the whole death tax/sell the farm nonsense has been debunked so many times and so many places," which, unless we've reduced the meaning of "debunked" to "shown to be somewhat overstated," is a pretty comprehensive claim.

You alleged that "the whole death tax/sell the farm nonsense has been debunked so many times and so many places," which, unless we've reduced the meaning of "debunked" to "shown to be somewhat overstated," is a pretty comprehensive claim.

Additionally, no one made that statement.

If the CBO's info is so good, why won't congress repeal that "parallel tax system" called AMT as they recommend? Made for "the rich," it now affects many of us. It's a scandal.

No, debunked is the proper term. Check it out. All Patrick did was describe the age old problem with farming; either the farm gets divided into uselessness or, in the end, there can only be one. Primogeniture solved the problem to the benefit of the military and clergy. Dying and leaving a buy out as the solution is poor planning.

"If the CBO's info is so good, why won't congress repeal that "parallel tax system" called AMT as they recommend? Made for "the rich," it now affects many of us. It's a scandal."

Because it's easier to make a mistake than to correct it - see the Medicare doctor compensation mess that needs to be regularily "fixed".

The latest fix for the AMT was part of the recently pasted tax bill. Note that the Republicans were willing to let the fix expire and screw over middle class folks unless the top 2% got their tax cuts.

It is mathematically impossible to pay 55% estate tax. The estate tax rate may be 55% but that only kicks in after the exemption (which has gone up and down between $1M to 5M but let's just use $1M as an example). You inherit a $2M estate, the first $1M is exempt leaving you with 55% on the 2nd $1M. Your tax rate is 27.5% ($550K / $2,000K), which is less than your tax rate if you, say, got paid $2M from actually working rather than waiting for someone to die. If the estate is, say, $1.1M you're paying 55% of only $100,000 or a tax rate of 5% on $1.1M.

Inheriting something non-liquid like a big mansion or farm does create some problems but as was pointed out you can spread the payments over 14 years (assuming you can't get a loan based on the asset's value). Yes that can be a headache but you're still getting $4 for the price of just $1. People who work have it a lot worse. If the dairy farm has huge operating costs, or its a horrible market for dairy farms or whatnot then the estate is going to be worth less to begin with which means less or no estate tax at all. But look if you don't have any cash at all and you inherit some huge non-liquid asset like a $10M mansion you're going to need to figure out a way to start getting some serious cash even if there's no estate tax. For example the mansion is almost certainly going to come with local property taxes that are huge and even if it doesn't just the cost of keeping it from rotting in the ground will require you figure out some way to make it generate income (say by renting it out).

The carping about the estate tax is pure republican class warfare. It impacts almost nobody whose passing on even a large estate, only huge estates are seriously impacted by it. I'd sum it up like this, if someone got ownership stakes of $100K in a family business every year for twenty years in exchange for working hard at it, he would have to pay a boatload of income and payroll taxes on it. Yet someone else gets $2M for doing nothing and the cry is even a penny of tax is an outrageous 'death tax'. Give it a rest.

Debunked? Your precious CBO is hysterical Al. You are blinded by what the data is actually showing.

Consider it this way, were the Mafia to perform such a study, they would take note that in all instances of people given concrete shoes, not one of them died from encasement in said concrete. Also, they would note that this concrete was free of any carcinogens and did not cause chest compression. Rather the study shows that all people who did die while subjected to concrete shoes did so because of drowning. As such, the Mafia concludes that people who refuse to pay them should consider swimming lessons.

Wealth, when tied up into long term capital investments such as a farm, is still wealth. As such, the inheritor must determine how much keeping the farm going is going to cost. Throwing on a 45-55% of total value over 14 years on top of any buy-offs and subsequent loans, state and federal taxes, regulations, licenses, etc. If the total cost exceeds the ability to pay, then the farm is lost within the first year, not the fourteenth. Since the death tax matures over fourteen years, sniveling leftists in government can rest easy that all the other obstacles combined with the lagging death tax will simply prove to be an insurmountable problem. The looming costs of the death tax will simply be another very large number in red ink, dangling like a Sword of Damocles, while corporate farm and subdivision development money provides an easy out. Thus, a farmer who gives up due to an impossible and insolvent position will be marked down as "lack of interest".

Boonton, while some of what you say is true, the part where a failing farm would be worth less is not. While in the State of Wisconsin, farm land does enjoy a lower assessed value than its actual value on the market, it can still be assessed for more than a mere $4 million, particularly if it has river access or is close to the newest and largest homes in the nearby subdivision.

As for class warfare, who are Republicans fighting? Or are you admitting to being part of a "ruling class" of apparatchiks? No, class warfare is the sole domain of the cult of envy known as left-liberalism. The death tax is a tax on top of the wealth that has been acquired over a lifetime, which has also been subjected to taxes. No, the death tax is not about justice, or fairness, or any such thing. Rather, it is about hating the good fortunes of others, and demanding that they must be punished. That the government, its power, its spending, and its taxation make useful tools in such vengeance is the sole spirit of the Left.

So much is revealed that callous phrase. Yes, how fortunate one is to have one's father die! Would that we all could have successful parents perish tomorrow! Just can't wait for that great day to dawn.

"While in the State of Wisconsin, farm land does enjoy a lower assessed value than its actual value on the market, it can still be assessed for more than a mere $4 million, particularly if it has river access or is close to the newest and largest homes in the nearby subdivision."

TRANSLATION: The land is worth $4M. Suppose you happen to inherit an acre of land in Manhatten just off of Central Park. That is worth hundreds, probably thousands of dollars per square foot. Just because you say you want to call it 'farm land' and try to grow corn on it shouldn't make it worth any less.

I get the liquidity issue here. If you happen to own an acre in Manhatten its perfectly legal for you to grow corn on it rather than collect millions in rent....but unless you have millions in cash you can't cover the costs of owning that land by selling the corn. This liquidity issue hits you no less with earned income. If you're Jerry Seinfield and NBC offers to pay you for a sequel to Seinfield by giving you land in Manhatten instead of cash you still have to find a way to cover income and payroll taxes and your problem is even worse than if your grandpa just left that acre to you

"The death tax is a tax on top of the wealth that has been acquired over a lifetime, which has also been subjected to taxes. No, the death tax is not about justice, or fairness, or any such thing. Rather, it is about hating the good fortunes of others, and demanding that they must be punished"

And you pay zero taxes on such an estate. The tax doesn't hit the dead, it hits the living. Is it your 'good fortune' that someone decided to leave you something in your will? Sure but its also 'good fortune' for you if you win the lottery or just happened to get a large gift from someone who is living simply because they like you. Both of those are taxed at rates much higher than the estate tax.

And punishment has nothing to do with it. As I pointed out anyone who gets $1M or more from being left it in a will will almost always pay less in taxes than someone who acquires the same amount through work or investment or even 'good fortune' like getting it as a gift or lottery winning.

The 'but taxes were paid on this' school of thought is deeply flawed here. Taxes were paid by the person who acquired the estate as they took risks and/or worked to acquire it. You, the person who is presumably inheriting the estate, took no such risks or put in any such work. A double standard is played here. When Grandpa dies with millions in the bank, the cry is that is the 'family money' and 'taxes were already paid on it'. But if Grandpa died millions in debt the same children and grandchildren don't cry that this is the 'family debt' and the creditors can go after their own earnings and assets to recover it. They tell the creditors the old man is dead and you can't have my paycheck to clear his debts. Likewise Grandpa can't really say you 'paid taxes' on the money if he kept it in his name until the last moment, reserving the right to swap you out of his will in exchange for the pretty cocktail waitress until the last breath of his life.

Really? It seems much more callous to inherit an estate by NOT waiting for someone to die......

Seriously, though, it sucks that people die. It sucks that your parents die whether or not there's an estate tax. If abolishing the estate tax somehow made it so that people wouldn't die I'll sign up on your bandwagon but it really won't so I'm not. The phrase isn't callous, the policy embodied by the anti-estate tax crowd is. It's pretty callous to say that the family that works together, slowly transferring the family business to the next generation as compensation for loyal work because both the old and young generations trust each other gets taxed big time but income acquired through a lottery-like will reading gets taxed not at all. Note we aren't even talking about equal taxation in both cases but simply just lower taxation in the latter case.

"Debunked? Your precious CBO is hysterical Al. You are blinded by what the data is actually showing."

Patrick, that is an assertion. You now need to back it up with numbers. The rest of your post is a series of assumptions that you are making up.

As Boonton pointed out, the estate tax is calculated on the value after the exemption which, based on dairy farm prices in your area, may cover the whole amount and, at minimum, will likely cover a significant percentage.

The situation for 2011 and 2012 is a $5 million individual exemption and $10 million for couples, a top rate of 35% and a stepped up basis. Since farms and some other small businesses can also elect for an special use valuation that can pare the valuation up to another $1,000,000, our Wisconsin dairy farmer has at least the first
$5 million exempted and could have up to $11,000,000 exempted. That probably covers all of the dairy farms in the state.

Are you aware that the term "death tax" was focus group shopped as part of a concerted effort by a dozen or so of the nation's wealthiest families to eliminate the estate tax? It had nothing to do with small family farms and businesses.

"rather than waiting for someone to die"

Touching and oh so innocent. Paul, just about all that folks who are at the level where the estate tax means serious money think about are estate considerations.

"As such, the inheritor must determine how much keeping the farm going is going to cost. Throwing on a 45-55% of total value over 14 years on top of any buy-offs and subsequent loans, state and federal taxes, regulations, licenses, etc. If the total cost exceeds the ability to pay, then the farm is lost within the first year, not the fourteenth."

Well technically there's no reason you couldn't extend the 14 yr period by using the property as collateral to borrow the money for the taxes. Let's say there's no estate tax. If the costs of running the farm exceed its revenues then it's not a farm but a hobby. Like any other hobby, it's you're decision whether or not you want to pay to do it. If there's nothing else that can be done with the land, then the estate is unlikely to be worth much which means no estate tax. But if there's other things you can do with the land, (say put houses on it, put up office buildings, etc.) then you're talking about a hobby by keeping it a farm. If I inherited a big office building filled with rent paying tenants but opted to kick them all out so me and my friends can have paintball matches in the empty cubicals, I have no right to cry poverty to anyone if the $5 'cover fee' I charge my buds can't pay the property tax.

If you want to say there's some special social worth in family farms that operate at a loss for multiple years, even decades at a time, then propose some special program to subsidize them and protect them from market forces. Why propose a policy that at best would only benefit a tiny portion of them (farms that are valued in the multi-million dollar range yet can't generate any non-trivial liquid income over a period of years or decades....). I'll make a deal with you, if you really want craft an exemption that honestly shields such worthy 'sons of the earth' from the estate tax but still hits the person who simply inherits a $10M portfolio of stocks, bonds and cash. and I'll support it.

"Are you aware that the term "death tax" was focus group shopped as part of a concerted effort by a dozen or so of the nation's wealthiest families to eliminate the estate tax? It had nothing to do with small family farms and businesses."

Indeed, notice how the 'sob stories' can be almost all resolved without abolishing the estate tax. You could, for example, make the estate tax a rolling lien on the property with interest set at zero for each year the property produces less income than its costs. The person who inherits a 200 yr old dairy farm that doesn't want to turn the land into developments can keep it in the family forever only having to worry about property taxes if they ever opt to sell it or start producing serious income from it.

But that type of reform is never proposed even though the sob stories almost all revolve around some hypothetical family trying to manage being property rich but cash poor. Instead the only reform that supposedly helps the sob story that is allowed into the discussion is one that helps Paris Hilton even more.

BTW, Patrick are you aware that had there been no tax deal, estate tax rates would have reverted to where 55% was the top rate and the exemption was only $1 million. This would have been a problem for many middle class folks. The House and the administration wanted to go back to 2009 levels ($3.5 million exemption and 45% top rate) but, and once again, Republicans (read conservatives) were willing to screw the middle class if they couldn't get cuts on income for the few at the top.

al
"BTW, Patrick are you aware that had there been no tax deal, estate tax rates would have reverted to where 55% was the top rate and the exemption was only $1 million. This would have been a problem for many middle class folks."

Let's just say that had happened. What would it look like to inherit a $3.5M estate? You'd pay $1,375,000 (55% of $2.5M, that's less the $1M exemption). That's a tax rate of about 39% on income of $3.5M. That's slighly less than the top tax bracket at the end of Clinton's term on earned income. In other words, even under this 'worst case' getting paid $3.5M for waiting for someone to die still is taxed slightly better than actually earning $3.5M.

The immorality issue would make more sense if it wasn't so self serving. Like I said, if Grandpa dies in debt that's his problem. His creditors can't come after your paycheck, your assets. But suddenly if Grandpa dies and there's $10M he had hidden in a savings account, that's the family's money and taxes were already paid on it etc. etc. If grandpa is Sam Walton his money is your money, but if he's Bernie Madoff then his debts aren't your problem.

If we had a system where there really were 'family assets', where you shared in your family's fortunes by law then I'd be sympathetic to this claim. And the does happen to be one place where this is true, in the case of spouses. If your wife dies with a bunch of credit card debt, the law lets it easily become your problem. In other words spouses are really a unit in terms of how the law treats their finances. And there the estate tax doesn't touch you. When a husband or wife dies their spouse gets the whole estate automatically, no probate, no estate tax no will. Which makes rough sense because spouses share in both the opportunity of good fortune and the risk of bad fortune. Those that the estate tax actually touches, though, do not.

"Republicans (read conservatives) were willing to screw the middle class"

Anyone who calls himself a conservative but is willing to screw the middle class is a conservative in name only. How long have you been hanging around this site, Al? How often have many of us bewailed the hosing of the middle class by BOTH parties? Does it all just go in one ear and out the other?

I support an estate tax because I think taxation should generally be neutral on how income is earned. If you make $100 because you spent an hour as a plumber, because you did some savy day trading, or because the little old lady who you were always nice too next door died and left you it in her will I think they are all generally the same. We can discuss progressive taxes elsewhere but I'm willing to accept a progressive income tax (so your $100 is taxed more if you already earned a few thousand $100 bills already).

I'm willing to complicate things because of practicality. If you're cash poor and you inherit grandma's $1,000 ring I understand that paying tax on that is not quite the same as just getting $1,000 cash from your employer. So the estate tax has a big exemption but then a high rate kicks in. I'd rather see it as a low exemption but lower rates and some sort of allowance for assets that may be appraised at a high value but can't be turned into cash to pay the tax easily. I'd also see it as more based on the individual inheritance rather than the estate, so someone who leaves a million people $100 each isn't the same as leaving one person $100M. But this is not the discussion that usually happens when the estate tax comes up. What usually comes up is the odd belief its moral to tax a person who works for a living but its a moral horror for a person who makes a 'job' out of waiting for people to die and leave him money to incur even a dollar of tax no matter what the amount.

Ever see the Monty Python sketch where the politicians are sitting around a big table trying to figure out what else they can tax, and having trouble finding something new, since there's already a tax on virtually everything?

It is mathematically impossible to pay 55% estate tax. The estate tax rate may be 55% but that only kicks in after the exemption

Pretty obvious, but it still doesn't mean a 55% figure was warranted (they reduced it I think). For that matter, its also impossible for average folks to incur a decent capital gains at the stated rate of 15% too. Because of AMT it can easily double and cap gains gets taxed as income. So I don't see the force of the "mathematically impossible" comment.

The high rate is due to the high exemption. At a $1M exemption, a $1.1M estate is effectively taxed at a rate of only 5% even though the marginal rate is 55%. Natually the exemption for earned income is nowhere near $1M or the current $3.5M.

Mathematically you can approach a 55% rate if you have an estate that becomes infinitely huge. I think the relevance here is that much of the argument about the tax revolve around 'sob stories'. With exemptions ranging from $1M - $3.5M you are not simply not going to get hit with anything near a 55% rate for inheriting some heirlooms, a nice house, a charming but economically shakey farm or whatnot.

The high exemption is justified on the grounds that many estates are simply not very liquid and we don't want to force people to have to sell off the family house or break up jewelry collections to pay a lower rate of 20-30%. My preferred policy would be a low exemption and treating inheriting income more as regular income with a stretched out payment plan for non-liquid assets with deferred payment if the asset is not used to produce non-trivial net income during a year. (In other words take your dairy farm that eeks out a tiny income every year and keep it as long as you like without paying anything but if you lease it to a shopping mall developer for $20M you're going to have to clean up the past due estate tax).

...abolition. Death is not and ought not be a taxable event. Why is this so hard for you to understand? Leftists insist on the morality of financially exhuming departed souls and shoving their bony hands with elongated and pointed fingers into the pockets of corpses to extract their cut of our earthly, tax-paying, existence after the fact. Really awful.

Why? First, while death itself isn't a taxable event, it may trigger one. Milestones in ones life often trigger taxable events or effects, birth, marriage, coming of age, disability, 59 1/2, reaching retirement age, and 70. You need to explain why death shouldn't be another such milestone.

"...into the pockets of corpses to extract their cut...",

Anyone whose wealth can be contained in their pockets will likely fall well inside the exemption limits, hence no grave robbing will occur.

The high rate is due to the high exemption. At a $1M exemption, a $1.1M estate is effectively taxed at a rate of only 5% even though the marginal rate is 55%. Natually the exemption for earned income is nowhere near $1M or the current $3.5M.

Mathematically you can approach a 55% rate if you have an estate that becomes infinitely huge.

Boonton, the rationale --including the mathematical aspects of it-- are all quite plainly obvious to those that have a pulse and do their own taxes. A better and more interesting question would be ...

My preferred policy would be a low exemption and treating inheriting income more as regular income with a stretched out payment plan for non-liquid assets with deferred payment if the asset is not used to produce non-trivial net income during a year. (In other words take your dairy farm that eeks out a tiny income every year and keep it as long as you like without paying anything but if you lease it to a shopping mall developer for $20M you're going to have to clean up the past due estate tax).

... what's wrong with treating it as a capital gain? This is the same issue with the AMT. Treating capital gains as income is a huge problem. Treating a guy who makes a low income and invests well as a rich person isn't right. And when you say "oh but he's not tax planned well" as I'm sure you will I don't think that is a good answer. The wealthy have tax lawyers, the average guy doesn't and even they admit it is very difficult to gauge the tax implications.

Though you've already dismissed this, the exemptions and rates don't justify the policy. You say "oh yeah but there's a 1 mil exemption. But right now even a 50 acre farm in the midwest where land is cheap with a barn and some equipment is around 1 mil, while an average house in many parts of the country are 1/2 mil. So you pay 1 mil on a 3 mil farm at 50% (for estimation purposes) and you say "hey he's rich so that's justified but he earned it over a lifetime of hard work and pays the same rate as a chairman of Exxon, except that the latter would have tax lawyers and dodge a good bit of it.

"Death is not and ought not be a taxable event." - Why?

It's ok if it triggers a cap gain, but death shouldn't be treated specially. But no one would be talking about treating it specially if we weren't treating cap gains as income. Set the cap gain rate and be done with it stop treating death as a taxable event in itself.

"Death is not and ought not be a taxable event. Why is this so hard for you to understand? "

Death isn't taxable, earning income off of other people's death is.

"Leftists insist on the morality of financially exhuming departed souls and shoving their bony hands with elongated and pointed fingers into the pockets of corpses to extract their cut of our earthly, tax-paying, existence after the fact. Really awful"

Stop being stupid. I'll make a deal with you, if you come back from the dead I have no problem letting you have your bank account, your property, your assets with no taxes due. But you receiving income from someone else's death is no different from you receiving income from any other source.

Mark
"... what's wrong with treating it as a capital gain? This is the same issue with the AMT. Treating capital gains as income is a huge problem. Treating a guy who makes a low income and invests well as a rich person isn't right. And when you say "oh but he's not tax planned well" as I'm sure you will I don't think that is a good answer. The wealthy have tax lawyers, the average guy doesn't and even they admit it is very difficult to gauge the tax implications."

well actually in this example it wouldn't be a capital gain. If you inherit a dairy farm that could sell for $20M but opt to use it as a dairy farm barely breaking even for ten years before you finally give up and sell to the developer for $20M there hasn't been any capital gain. You simply opted to use the land for a less valuable use either as a hobby or out of loyalty to some family tradition or a Jeffersonian belief in being a 'son of the soil' or whatnot.

I don't think that taxes should be avoidable by 'clever planning' but think in term sof the 'average guy' trying to fix issues like the AMT would be a better priority than abolishing an estate tax that is almost impossible to touch the 'average guy' as it now stands.

"Treating a guy who makes a low income and invests well as a rich person isn't right."

I'm not sure where you're getting this. IMO earning $100 is earning $100. If a plumber earns $100 working an extra hour overtime that's taxed at a high rate. If he earns $100 day trading on his stock account that's taxed at a lower rate. IMO that doesn't make any sense. He wouldn't be taxed 'like a rich person' unless he was already a rich person.

"So you pay 1 mil on a 3 mil farm at 50% (for estimation purposes) and you say "hey he's rich so that's justified but he earned it over a lifetime of hard work and pays the same rate as a chairman of Exxon, except that the latter would have tax lawyers and dodge a good bit of it. "

But he isn't paying it, you his son or grandson or heir is paying it and you didn't earn it over a lifetime of work. This is a very self serving argument. You want to claim credit for your grandpa paying tax on all that lifetime of work and risk taking yet you would never tolerate being tied to your grandfather's misfortune. If grandpa dies in debt you'd never allow him to pass on his debts to you. As long as he is alive he enjoys his wealth tax free because he paid taxes to earn it in addition to the hard work and risks he took. When he gives it to someone else, though, that becomes income to them.

Look at it like this, suppose grandpa opts instead to pay Meatloaf $2M to give him a private concert. Meatloaf gets $2M in income and pays tax on it like someone who has earned $2M. Meatloaf can't say "but the old man already paid tax on this $2M!" This reasoning becomes totally circular. Since income moves around and around in the economy someone has always 'already paid tax on it'. A dollar doesn't get into your wallet unless it comes from someone who already paid tax on it.

Now I'm not a lawyer or tax expert but I think some of the tension in this debate comes from putting form over substance. I believe what happens legally (correct me if I'm wrong) is that when a person dies their property is transferred to a legal fiction called an 'estate'. Like a corporation, this entity files an estate tax return, settles with the IRS and state taxing authorities and then issues the remaining assets to the heirs either according to a will or according to whatever the probate law is for those who die without a will.

So in form you as someone inheriting an estate do not pay taxes. There is no space on your 1040 form to report that you inherited $1M and for you to calculate tax on it. In substance, though, you do pay the estate tax since if there was no tax your share might have been $1.5M or $2M or whatnot. The form of taxing the estate before it gets distributed out to heirs is only there because its easier to do it when the estate is in one place rather than after it has been broken up into pieces. I don't have any objection to changing the form by making the estate tax something you report and pay as a person receiving an inheritance but the claim that the tax is hitting people who have 'already paid taxes' on their income complete with the zombish images of dead people in coffins being made to write checks to the IRS is, at best, only about form....it is entirely devoid of substance.

"The wealthy have tax lawyers, the average guy doesn't and even they admit it is very difficult to gauge the tax implications."

And the average guy doesn't need one. A handful of people are going to be in a marginal situation but it's simple for most people. The last parent dies. The cash and securities are easy to value. It is also easy to find out what similar houses in the neighborhood have sold for. Most people can do this in their head and for most people that number isn't going to be anywhere near $10,000,000.

""hey he's rich so that's justified but he earned it over a lifetime of hard work and pays the same rate as a chairman of Exxon."

An interesting comment and why I would raise the top marginal rates on income, however we aren't talking about the guy who worked hard over his life time, he's dead; we are talking about his heirs.

"Treating a guy who makes a low income and invests well as a rich person isn't right."

Why? If he invested well, he no longer has a low income; he is now rich and should be taxed at that level.

"And when you say "oh but he's not tax planned well" as I'm sure you will I don't think that is a good answer."

Which is your right but we all know one thing for sure - at some point, sooner or later we are going to die. It is not at all unusual to for folks to plan. In fact as I pointed out above, for most wealthy people this is what they do. Anyone who has a business that he wishes to go on after his death had better plan. Leaving it for the heirs to sort out with loans and buy outs is likely the sign of a marginal concern.

What's interesting is that people who use the 'already paid tax on it argument' also are often advocates of replacing the income tax with a consumption based tax. That's interesting because if you did that then people who already accumulated wealth under the income tax regime could make the same claim....they paid tax to earn the income now they have to pay tax to spend it.

On the other hand, a consumption based tax would resolve the 'sob story' over inheriting the family farm or estate. If your intention isn't to cash it in and go on a spending spree there's no tax to worry about.

What's interesting is that people who use the 'already paid tax on it argument' also are often advocates of replacing the income tax with a consumption based tax.

Or just reduce the size of the federal government to the point where a small, general import tariff would cover expenses. And reduce the size of state and local government to where a small property tax is sufficient to fund expenses. Problem of taxation is solved.

I was going to write that it might be easier to just have the Fed. gov't invest in a one way time machine to shoot you back in. But then I recalled that actually the Civil War almost started before it actually did because of 'small general import tariffs'. The income tax was adopted because consumers were killed with import tariffs that benefitted domestic manufacturing firms but raised the general cost of living thru the roof. The past was not as simple or small as people like to think it was.

Correct. The CW did not almost start over taxation -- Boonton is probably thinking of the Whiskey Rebellion -- the income tax was to finance the war in 1862, and was repealed in 1872. It is true that excise taxes were the primary means of obtaining revenue in those days, and how it effected one depended on one's vocation and region and it was a source of friction, but nothing to go to war over, though it is worth attacking the home of the local tax inspector. The past wasn't as simple as Boonton thinks.

There probably isn't anyone here, save him, that doesn't know that Christ was born in Bethlehem because Joseph had to travel there for the purposes of taxation.

Luke 2:1-5: And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed. 2(And this taxing was first made when Cyrenius was governor of Syria.) 3And all went to be taxed, every one into his own city. 4And Joseph also went up from Galilee, out of the city of Nazareth, into Judaea, unto the city of David, which is called Bethlehem; (because he was of the house and lineage of David:) 5To be taxed with Mary his espoused wife, being great with child.

Treating a guy who makes a low income and invests well as a rich person isn't right.

I'm not sure where you're getting this. IMO earning $100 is earning $100. If a plumber earns $100 working an extra hour overtime that's taxed at a high rate. If he earns $100 day trading on his stock account that's taxed at a lower rate. IMO that doesn't make any sense. He wouldn't be taxed 'like a rich person' unless he was already a rich person.

I was referring to AMT here. I shouldn't have conflated that with estate. When AMT triggers you get taxed on the capital gains at the same rate as those who earn the same amount as their yearly salary. If a long-term capital gains rate is set at 15%, it should be that not double that.

I think you were talking about estate taxes, but your "money is money" attitude is bizarre since obviously the government disagrees, and that's why we have cap gains, estate, inheritance, gift, income, and a whole bunch more all at different rates and rules.

As far as estate taxes, the debate is entirely non-focused so it isn't clear what the argument is.

-I don't dispute the right of the state to tax capital gains or levy an estate tax. Some do --I don't. If that is all you are saying I'm fine with that.

-Do you dispute that estate taxes were onerous before 2001? If not there isn't too much for me to argue with you about. I'm not saying I'm fine with them now, but in an unfocused discussion like this we're not going to get anywhere unless we agree what we're arguing about.

-I do dispute that your attitude of "oh, estates are simple ... Most people can do this in their head" is accurate. I just walked across the hall and spoke with a friend in a department that handles estates and he told me how vastly complex it is, and how unsecured property taxes and such hit them regularly even though it is a matter of verifiable public record that they've already been paid. Large bills can come due years after the fact even if you think you know what you're doing. This is the domain of specialists. I didn't get the impression that estates were simple at all, so if you want to argue that you need to have some experience to draw on. I am interested in this not to argue with you, but to perhaps help to advise my mom who doesn't know much about it.

Also, you noted that the term "death tax" was focus-grouped or some such. That is no more interesting than the fact that some lobbyists love the estate tax and agitate for its continuation. Same as it ever was. Life insurers are notoriously happy to have estate taxes.

If we're going to learn much here about estate taxes it won't be by someone playing fast and loose with facts, nor someone who insists it's simple when it isn't. Liberals seem to never find a tax they don't like I think because they love the control aspect of it. It almost seems like you enjoy imagining that you are controlling other's money.

Large bills can come due years after the fact even if you think you know what you're doing.

I meant to say "Large bills can come due years after the fact no matter what you do". With unsecured property loans ignorance is not the problem. My friend said you might be able to avoid them if you know you will be subject to them by breaking the law to do it.

Mark, estate taxes are simple for most people as only 1 or 2% will be subject to them. Most estates don't come close. Dad dies and leaves you a house in an area where similar houses are selling for $350 K and and has $400 K in savings. That you can do in your head. Remember the exemption is $5M individual/$10M couples.

If you are in the LUCKY 1 or 2%, you have tax issues that require professional help. Say Dad also has a quarter section acquired decades ago but now is right in the path of Megatropolus, then there's the 1000 shares of Microsoft he bought in 1986 and the 1000 shares of Apple in 1980 (both pre-splits). You can do that in your head too, and the rough number will tell you to get some help.

If you read what I wrote, my meaning was clear. Most estates don't come close to $3,5M (2009) or $5M (2011, 2012) exemption so its easy for most people.

Yes the process was screwed up prior to the rise in exemptions. The AMT needs a permanent fix. It sounds like you fall in the $74K (couples) trigger.

"When AMT triggers you get taxed on the capital gains at the same rate as those who earn the same amount as their yearly salary. If a long-term capital gains rate is set at 15%, it should be that not double that."

"I think you were talking about estate taxes, but your "money is money" attitude is bizarre since obviously the government disagrees, and that's why we have cap gains, estate, inheritance, gift, income, and a whole bunch more all at different rates and rules."

Why is it bizaare? It's right. We hve different tax systems for different types of income not because there's some thing magically special about getting $100 from your dead grandfather that makes immune from taxes, a bit less magical 'bout selling some stock for a $100 profit and even less magical about $100 from working some overtime. This is due to a combination of special interest pressure as well as some legitimate concern about 'sob stories' such as estates that are valuable but not very liquid.

"Do you dispute that estate taxes were onerous before 2001?"

To what degree was it onerous compared with the taxes a person who made a similiar amount by winning the lottery or getting a very high paying job would have to pay?

"This is the domain of specialists. I didn't get the impression that estates were simple at all, so if you want to argue that you need to have some experience to draw on. I am interested in this not to argue with you, but to perhaps help to advise my mom who doesn't know much about it."

Does he just work on estate taxes or estates? Estates are complicated, especially if you're dealing with one that has a real lot of money and maybe heirs that are a bit too interested in getting a big cut from them. Even without an estate tax the way we handle real estate property is really archaic with local titles, having to pay for manual judgement searches and then paying again for 'title insurance'..... I'm not sure if its just because there is no easier way or if its because an easier way wouldn't work for lawyers and other hangers on whose made a living out of it. Ohhh and I guess we didn't mention that some, but not all, states have their own estate taxes.

My friend deals with estates. Honestly, I don't think this debate is fruitful anymore. You seem to want to press issues that are fairly obvious and I'm not disputing, such as what an exemption means and whether the state has a right to levy estate taxes. And the advice you are giving seems naive when I talk to people that have experience.

That's fine, I don't think I have given anyone advice though. If you're working with an estate that's in the multi-million dollar range you pretty much need to employ a professional which I don't claim to be.

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